Pensions auto-transfers under threat as experts lament archaic systems

delays

Pension transfers stuck in a “time warp” are set to come under the spotlight as the Government launches an investigation into blockages to the radical new freedoms.

In June, Chancellor George Osborne announced a Treasury consultation, expected to be formally unveiled as part of the 8 July Budget, aimed at addressing why some customers’ access to the flexibilities is being frustrated.

The Government says it will investigate how to make the pension transfer process “quicker and smoother to help people make use of the new freedoms” and pensions experts say intervention is long overdue.

The Association of British Insurers is also piling the pressure on occupational schemes. As part of its “action plan”, it says The Pensions Regulator needs to work with the FCA to outline trustee responsibility in delivering the freedoms to members.

At the same time, former pensions minister Steve Webb’s brainchild, the pot-follows-member model for automatically transferring small pension pots, looks under threat.

Webb’s successor Ros Altmann has publicly criticised the proposals in the past, and there is growing feeling within the pensions industry it should be scrapped despite the Department for Work and Pensions already passing legislation.

Transfer pressure

As evidence emerges of customers being frustrated by restricted access to the pension freedoms, the Government is upping the pressure on providers to ensure savers are not blocked from full flexibility.

The limited flexibility of legacy pension plans, providers’ adoption of mandatory advice thresholds, and new second line of defence rules have been in the spotlight in recent weeks.

Last week, Money Marketing rev-ealed the Treasury and HM Revenue & Customs are considering revisiting historic “buddy transfer rules” on tax-free cash and small print that prevents drawdown pots from being merged.

Now experts predict providers’ creaking transfer systems could be next in the firing line.

Fidelity Worldwide Investment retirement director Alan Higham says the administration of pension pots is “really still stuck in a time warp”.

“It hasn’t moved into the new world where you can move money around at the press of a button.”

Hargreaves Lansdown head of pension research Tom McPhail agrees there are “big holes in the system”.

He says: “I have flagged with the Government that everyone needs to work together to unpick the blockage points in the system.

“When you look at banking, I can transfer money from Barclays to NatWest in minutes. It works because of established protocols.  A lot of the problems in the pension system are because providers don’t speak the same language, don’t use common protocols, don’t even know who each other are. We need a much better and more coherent governance structure around the entire process.”

Origo is owned by the country’s largest pension providers and its Options Transfers service handles the vast majority of transfers between contract-based, retail schemes. It says average transfer times are around six calendar days although this dropped to five in February before rising to seven in May with the launch of the pension freedoms.

Manual, paper-based transfers typically take 51 days, according to Origo, exposing funds to much greater risk of missing out on rising markets.

However, very few occupational trust-based schemes have signed up to Origo, although auto-enrolment provider The People’s Pension joined in May. According to 2011 research conducted by Origo, there are 128,000 occupational transfers a year taking an average of six to 10 weeks each to process.

The majority of Sipp providers use Origo and experience average transfer times of six calendar days. However, Sipps holding more specialised assets, such as property, can take between six months to two years, the organisation says. Since 2012, there has been a four-fold increase in Sipp transfers going through Origo.

Higham says: “In our experience the worst offenders tend to be occupational schemes. There are certain providers who are notoriously bad and one always suspects that’s a deliberate policy.

“Interestingly, occupational sch-emes have timescales within which they have to do a transfer in, but in the contract world there is no specific timeframe specified by regulation to make a transfer. They just want what is “reasonable”.

“The Government should definitely instruct the regulator to tighten up this area. It’s lax and inconsistent at the moment, there’s no real excuse for not progressing things.”

McPhail says the Government could impose a time limit on transfers but warns “they’ll get a lot of resistance, unless they work with the industry”.

He says: “It might not be wilfully self-serving resistance but genuine concern about an inability to meet timescales imposed because of the obstacles and concerns around things like pension liberation fraud.”

But Origo managing director Paul Pettitt says he does not expect a time limit will be mandated.

He says: “We have a traffic light system based on the speed of trans-
fers so providers can work on transfers that have been sitting on systems for a few days, to keep averages down. By and large the industry’s on top of it.”

A Standard Life spokesman says customers encashing their pot through the provider wait five days or less while transfers out of pension plans are “a few days”.

Aviva customers have a 10 working day turnaround on part or full cash payments once applications have been completed.

For former Friends Life customers there is a 10 to 20-day wait, according to a spokeswoman.

Scottish Widows says transfers out take five to seven working days, while cashing out a pot or moving into drawdown is completed in five working days.

Transfers out of Royal London through its intermediary business are completed in around 10 days.

A spokeswoman for closed-book provider Phoenix says transfers to another pension scheme took an average of 10.4 days in May and an average of six working days to fully cash out.

A TPR spokesman says: “We are working with the Government, the FCA and the industry to make the pension freedoms operate in the interests of members, including work to understand barriers to members accessing their pension flexibly. We are  visiting occupational schemes to gather evidence on how they have adapted to the changes.”

Small pots problem

Auto-enrolment is expected to produce millions of orphan pension pots as employees switch jobs and lose track of their savings.

To tackle this, the DWP introduced the pot-follows-member system for automatically moving pots of £10,000 or less to savers’ new workplace scheme.

But the proposal was met with fierce criticism from many who
favoured alternative models based around central or digital aggregators.

Fears were raised around the potential for savers to inadvertently give up valuable benefits by moving to poorer quality schemes, and be exposed to scammers.

However, in January, Webb ann-ounced the system would be going ahead as planned, with the initial roll out on an “opt in” basis of the largest providers from October 2016.

But Altmann said last year “the current proposals for pot-follows- member will not work unless there is a clear minimum standard for all auto-enrolment schemes”.

And experts say the DWP should now abandon its plans.

McPhail says: “It’s one of the things Webb got fundamentally wrong.

“The regulatory impact assessment didn’t even look at a solution that didn’t involve the mass selling and repurchasing of underlying assets across millions of accounts every year.  They never stopped to consider an alternative and Webb became fixated on it.”

Pension Playpen founder Henry Tapper says: “The difficulty is it can’t be good for more engagement with pensions without at the same time causing massive leakage. Webb’s vision was forcing all the money down pipes that are frankly not working. If you leak 5 or 10 per cent of the cash value in transaction costs, it’s too high a price to pay for the benefits of aggregation. ”

But Webb says the Government spent an “awful lot of time” consulting the industry. He says: “We’ve got to tackle the small pots problem. The great beauty of pot-follows-member is your pot is with your current emp-loyer, if they are all somewhere else employees and employers are not really engaged.”

And he refutes claims millions of small transfers would have to be completed.

“I have always thought it could work like the clearing banks, where the net amount is set between two organisations each day. And regardless of pot-follows-member, we need to make pension transfers cheap and cheerful.”

A DWP spokesman says there has been no update on the Government’s position since the opt-in announcement.

Adviser views

Robert Reid, managing director, Syndaxi Chartered Financial Planners

There’s no excuse for transfers not to be electronic. Most of these occupational schemes are still paying transfer values by cheque. A lot of the systems are quite archaic and were built at a time when the most expensive thing on a computer was storage space. I don’t have a problem with the concept of pot-follows-member and bringing pots together. At the moment people don’t know where they are and all the research points to people being more engaged when it’s in the same place. The problem is there isn’t efficient movement of assets.

Chris Daems, director, Cervello Financial Planning

For the  freedoms and auto-enrolment to work we need to make it easy for consumers. Pot-follows-member is easier for the consumer but there are practical issues. A lot of the problems come from the fact there is no standard language or system for pension providers. When it comes to transfers if you’re making the big decision about releasing cash from pensions, unless they need the cash for an emergency, a month is not a long time to wait. What concerns me is when you hear stories about 12-week delays from some providers who are just not geared up for the freedoms.

Expert view

Tapper-Henry-First Actuarial-2013Henry Tapper, founder, Pension PlayPen

Whether you are moving house or moving money, the process is fraught. We are no closer to pots following member than when the “portable personal pension” was established in 1987. The friction involved in moving money from scheme to scheme, fund to fund, asset to asset means money tends to stay where it is.

But for those wishing to consolidate their pension savings, there are barriers to transfer that surmount these operational issues. Chief among them are the issues to do with guarantees – the guarantees surrounding the payment of a pension as opposed to lump sums. Since the cost of meeting these guarantees is determined by the markets, their value should be calculable at a market rate. But what price can you put on human longevity?

These are hard questions. It is easy to open Pandora’s box and allow pension freedoms out, but it’s harder to ensure people get fair value from their pension savings.

These hard problems have not yet been properly addressed. We are good at making financial judgements based on critical yields but we are bad at helping with decisions demanding emotional intelligence.

People’s objectives in later life do not overlay neatly onto the income streams of a conventional inflation linked joint life annuity typically offered by a defined benefit occupational pension. The success of Pension Increase Exchange programmes – a form of transfer- suggests that many people would prefer more income sooner rather than higher income in their last phase of life.

And simple critical yield calculations can take no account of individual life expectancy. Should those with years or months to live be treated as if they will live on for decades?

Depending on whether you look at the questions around transfers through a financial or emotional lens, you will get different answers on what to do.

In my experience, making decisions based on such complex judgements is extremely hard and people tend to be polarised in their behaviours. At one pole, there is a meek acceptance that to stay put and do as one is told is prudent. At the other, we find people digging in their heels and demanding freedom. These are our insistent customers.

For most people, a balanced approach is needed. Hopefully we will find a synthesis between the polarities but there is going to have to be some common sense applied to get there.